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The New Deal – Did it work?

April 30, 2009

The New Deal

At this moment the government is working to try and end our current economic woes. Much of the governments solutions deriving from the Great Depressions’ New Deal, are debatable.  I think it would be great to search the records and find the effect the New Deal really had. If the New Deal helped, great; we are on the road to a steady recovery. If not, we need to change course. If the New Deal had no effect, perhaps it was just a waste of money? This question is crucial, and cutting through partisan bias will be hard, but like John Adams said, “Facts are stubborn things; and whatever may be our wishes, our inclination, or the dictates of our passions, they cannot alter the state of facts and evidence” (269).
When most people think of the New Deal, they think it was a single push to revive the economy. The New Deal was actually split into two New Deals. The first New Deal  in many ways was started by President Herbert Hoover. In June 1932 Hoover ordered the Reconstruction Finance Corporation (RFC) to give 300 million dollars in relief to banks (Hamby 14). Franklin Delano Roosevelt (FDR), came into office the same year promising to help everyday people. The first New Deal was aimed at immediate relief and lasted until 1934. The second New Deal was rung in with the passing of the Social Security Act in 1935. The goal of the second New Deal was to focus less on short term emergency relief and more on long term relief (Hamby 26). During both New Deals there were distinct functions the programs had. The New Deal programs were either for relief, recovery, or reform (Taylor 1). The two  major areas of concern during the whole New Deal were the extremely low prices of goods, and the high unemployment rate.
To battle the low prices FDR created the Agricultural Adjustment Act   (AAA) in 1933, funded by taxing food and clothing (Folsom, 125). The AAA stopped farmers from planting crops so the price of their crops could rise and thus equalize the low prices of goods. The problem with this is that millions of people were already starving and less production means less jobs feeding the unemployment statistic. According to the CATO Institutes “Tax & Budget” bulletin, the AAA plowed under a total of 10 million acres of crops, and slaughtered 6 million pigs.  This solution was also tried not only for farmers, but for the whole economy as well. So there after Congress passed the National Industrial Recovery Act (NIRA) in 1933 to force low production on businessmen; Those who did comply with the new reforms were fined and sometimes arrested. (Edwards 2)
Not only did the government try many ways to prop up prices, they also tried to prop up wages. NIRA created codes or standards for every business, making the cost of employment higher. The Social Security Act, and minimum wage rules retarded any employment boom that might have come naturally, hurting the cost of production and employment (Edwards 2).
With the interference government was taking into the economy stunting and even hurting unemployment, there were many things the government did to try and create jobs. The Civil Works Administration was created in 1933 and employed 4 million people with things like “Shovel ready” jobs. Along with this work program, the Tennessee Valley Authority was created to build dams in the Tennessee Valley area. In total the TVA had built 20 dams (Taylor 2). Jim Powell, Author of FDR’s Folly has a different view about the TVA,

“Receiving TVA-subsidized electricity gave Tennessee valley farmers an incentive to remain in agriculture . . . people left farming for manufacturing and     later for service industries at a slower rate than was the case in bordering states”     (149).

It did not stop there. To make way to build these dams, the government forced over 15,000 people out of their homes. Tenants who did not own land were not compensated (Powell 151).
On top of all of these efforts, the government and especially FDR was not fond of deficit financing. All the New Deal spending was supported by taxes. The taxes during the New Deal crippled businessman and slowed down any inevitable recovery. Prior to FDR becoming President, excise taxes (a tax on commodities manufactured in the United States) was only applied to cigars and cigarettes. During the 30’s FDR more than doubled excise taxes. As Burton Folsom describes in his book “New Deal or Raw Deal”, the new taxes really overlaid a wide array of commodities.

” . . . new excise taxes included duties on cars, movie tickets, radios,     phonographs,     telephone calls (long distance), telegrams, cosmetics, cameras,     bank checks, stock transfers, yachts, jewelry, furs, and a new one per cent     gallon     tax on gasoline” (122).

From 1929-1935 income tax revenue fell 50% while excise tax revenue doubled (Folsom 125). These excise taxes also contributed to the high unemployment rate because of the high taxes on production. Excise taxes are the worst kind of tax due to it’s ability to affect everyone, especially the middle and lower class. FDR was not afraid to tax the rich either. In 1935 FDR proposed a bill to tax the top incomes up to almost 80%. This was the highest that has ever been seen in American history (Folsom 128).  As the New Deal began to wind down, so did the taxes.
So what effect did all of this have on the overall economy? It seems it did not have much of an effect; Since the two main problems of the Great Depression were unemployment and low prices. The unemployment rate stayed on average about 17.2 percent up until 1939. (Dilorenzo 1). There even seemed to be a depression within the depression in 1937 when GDP fell. Overall it seems the spending is not what hurt the economy the most. The taxes and failed programs is what stagnated the economy over the decade.
If the New Deal did not help, how did the United States get out of the Great Depression? Some economists say that the entry into WWII and massive government spending ended the Great Depression. This theory seems to not make sense because those unemployed are still around, they just got conscripted into the army. This reflects with the unemployment rate falling in the early 1940’s. The stock market prices were also still below that of the years before 1939 (Folsom 246). Others say it ended in 1945 when the troops came home. During the time leading up to the war, FDR relieved the burden of taxes, and after he tragically died,  businessmen in general felt more comfortable with Truman in office ( Folsom 248).
So how does all of this relate to today’s economy? In many ways there are parallels. We have tried deficit spending, stimulus packages, and New Deal like programs to help our economy. Over a year of all this spending, and nothing has changed. This current crisis is no where near that of the Great Depression, but if we want to get on our feet any time soon it seems that we should abandon the myth that the New Deal helped. The government is trying to do all it can to get us out of this economic slump. Perhaps those in government should take a lesson from the likes of John Adams and our Founders; A time when doing the right thing was done rather than doing the easy thing.

– Jon Lauro

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One Comment leave one →
  1. May 4, 2009 5:33 AM

    Hi, good post. I have been pondering this topic,so thanks for sharing. I’ll definitely be subscribing to your blog.

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